Iron Boom to Take These Two Up

• Your DR service gets one right
• A key chart to understand the iron ore boom
• Plus, new highs coming for the Aussie dollar and ASX

Callum Newman

Dear Reader,

My my, look at iron ore go. It’s now more than US$190 a tonne.

That’s more than a 10% rise since I floated the idea that it was the sector you could be trading back on 29 March.

The Daily Reckoning Australia can put you ahead of the game.

I told you last month that I picked up some stock in Fortescue Metals. This was at the same time investment bank UBS was downgrading BHP and Rio Tinto on a weak outlook for iron ore.

Fortescue went up 4% yesterday.

Now what do we see in the mainstream press? Bell Potter has upgraded FMG from a buy to a hold and says it could deliver a record dividend of $2.41 per share.

That’s not all.

The iron ore sector as a whole rallied strongly yesterday while the rest of the market went mostly sideways.

This is not to say I’m Mr Clever. God knows the market makes a fool of me often enough to counterweight the wins.

But I did come across an interesting chart a few months ago that gave me the confidence to go against the general consensus here.

I’ll share it with you now because it might still be important to show why iron ore could stay higher for longer. The surprise might be how high it goes, and how high it stays.

Here it is…

See those orange bars? That’s the level of Australian exports. They’ve been flat for years.

Now benchmark them against the rising blue bar — Chinese steel output. You can see that it’s in an uptrend and, as yet, is not slowing.

But we also now have the US and Europe into the mix in a way they weren’t before. Both have big infrastructure plans. All this requires steel.

It’s not as if this dynamic is going to end tomorrow. Europe has made it clear it will fight to protect its car industry. They can only happen if it captures the new electric vehicle revolution.

We can expect lots of infrastructure investment off this alone. And the state of US bridges, roads and rail is a disgrace.

The entire country needs an upgrade. The American Society of Engineers has been saying the same thing for years.

The interesting part of this dynamic is the only mines that BHP and Rio Tinto are due to bring online anytime soon are replacement production for ones that have come to the end of their useful life.

That leaves the burden of bringing on new supply to the junior sector, which can bring vigour but not massive scale.

All this is why you should be watching the COVID situation in Brazil. Any potential lockdowns or shutdowns in their key iron ore mining region could add petrol to the bonfire. The same is true here, though seems less probable right now.

A word of caution at this point. Commodities do not go up in a straight line. There are dips and down days. But the point for today’s Reckoning is to say that it’s not clear to me iron ore has peaked, in the short or long term.

I saw one commentator recently opine that the price was defying ‘gravity’.

I hate this expression. Gravity has nothing to do with it. It’s based on end user economics.

If steel mills are earning good margins with iron ore at US$190 a tonne, then they can continue to pay it.

And Chinese steels mills ARE earning good margins. The price of rebar steel just hit a record high in Chinese yuan.

How long this party continues is anyone’s guess. But right now this dynamic is not only proving profitable on the ASX, it’s bailing out the country’s finances.

It will likely send the trade balance sharply into surplus too — more fuel for the Aussie dollar boom we touched on yesterday.

The river of cash flowing through the big miners right now is likely to send the Aussie market into record highs too.

Strap yourself in as iron ore takes the Aussie dollar and ASX up.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia